Does the PPF fit into your portfolio?

A few years ago  I conducted a Twitter poll and was pleasantly surprised with the response. But the outcome took me aback. I was unaware as to how many did not have a Public Provident Fund (PPF) account.

Over 5,000 Twitter handles participated and only 57% had an account. The rest either had not heard about it, were too lazy to open one, or were sure that it did not fit their plans.

At one time, I would encourage everyone to open a PPF account. While I am still a big fan, my perception over the years has changed.

The mistake I always made when I suggested PPF was simply viewing it as a great debt product which is high on safety and super tax benefits. Think about it, putting away money for 15 years with a guaranteed return that is tax free and risk free. Who would not want to opt for it?

But being a great product does not imply that it is a natural fit in any portfolio.

Does it find a strategic place in your portfolio?

For many, it could be part of their debt allocation. This is the case with me. My debt portfolio has non-convertible debentures, one bank fixed deposit, debt funds, and the PPF. The assuredness of return, the safety and longevity of PPF appeals to me.

A family member has a PPF account and so does her husband. They both contribute Rs 1,50,000 each, every year, into their own respective accounts. They extended it by 5 years when it matured. This is part of their retirement kitty.

A consultant told me that the PPF did not make sense for him from a practical standpoint. He was not assured of a monthly steady income, and so cash flow fluctuated. As a result, he was just not comfortable locking up money for an extremely long duration which could not be easily accessed.

Also, salaried individuals who are contributing to the Employee Provident Fund (EPF) and Voluntary Provident Fund (VPF), could bypass the PPF. For the EPF, a salaried individual will contribute 12% of his Basic + Dearness Allowance and the employer will match the contribution. The employee can also opt for VPF and top up the contribution to the provident fund, though the employer won’t match this. The returns too are marginally higher than PPF and the safety factor holds, as does the tax benefit.

Some may cover the Section 80C limit with life insurance premiums, child’s education fees, contribution to EPF, and investments in Equity Linked Savings Schemes (ELSS). They may not feel the need to own a PPF account to form part of the debt allocation of their portfolio.

Others who have decades to retirement may not be interested and prefer going heavy on equity.

Many find the PPF tenure to be agonizingly long, a 15-year investment with a 16-year lock-in. The first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters. So if you opened the account on July 15, 2000, the 15-year tenure will commence from end of FY2000-01 (March 31, 2001). That means, it would have matured on March 31, 2016.

On the flip side, this lock-in is a blessing of sorts. It silently grows and accumulates into a reasonable corpus.

There is no one size fits all when it comes to investing. It is personal finance, personalize it.

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